I've been following the MMM site and forums for over a year, but am posting for the first time as my wife and I are considering our real estate investment strategy for the next few years. We are really lucky in that the only home I’ve bought has appreciated significantly and also has a lot of cash flow potential, and I want to use that opportunity in the best way possible.
The details: I’m 32 and recently married to a great woman with the same financial goals. We’d both like to be financially independent by the time I reach 40, and one of us may stop working in about two years if we have kids then. We live in Washington, DC, in a house I bought in January 2011 for $355k before I met my wife.
Our neighborhood, which is mostly city rowhouses nearly identical to mine, has seen a lot of gentrification and renovated homes within a two block radius have sold for $650K-$700k in the past year. This year Redfin named it named the most lucrative neighborhood in the country to flip homes, with an average gain of $312K. My home was appraised at $504K when I refinanced in early 2013, but it hadn’t seen much updating or renovating.
The four-bedroom house is nearly 100 years old and in many places shows its age. The first thing I did when I bought it was convert the basement into a separate rental unit that I rent out for $1,175. Before we married I also rented out the extra bedrooms for about $800 each, so with my monthly payment of $1840 I was living for free and still getting cash flow. Since we got married and my wife moved in we only rent the separate basement unit out, meaning we have a monthly payment of $665. Right now we are focusing on completely updating the place in order to increase its value and make it on par with the newly renovated homes on the block.
Our financials: Since we got married we’ve been able to save between $4,000-$4,500 per month (about 60-65 percent of income) but that would go way down if we have kids. No debt other than the $1,840 mortgage payment.
Savings: $60,000
Vanguard VTSMX: $12,200
Simple IRA: $5,629
Mortgage owed at 3.75%: $327,000
My wife just got a 401k through a new job she started last month and I greatly increased my contributions to the IRA through my employer this year, so we are upping those savings.
The options: We’d like to move to a more rural and lower COL area in the next two to three years but stay within 150 miles of DC. We’d also like to invest relatively local, also within 150 miles and would rather buy and hold for the steady cash flow. So after completing renovations, here are the options I’ve been able to come up with, but I’d like to hear your thoughts.
A. Move out of DC in two years and buy a fixer upper home with a conventional mortgage for us to live in. Rent out DC property indefinitely, which conservatively with basement unit could bring in $3,500 per month. Use HELOC on DC home to buy second investment property (likely SFH or duplex). Sell primary residence after fixed up in two to three years and buy new more long-term primary residence with capital gains. Use savings and financing to buy third investment property etc.
B. Buy an investment property in regional city in 2015 using combination of savings and a HELOC. Move out of DC in two years and buy a fixer upper home with a conventional mortgage for us to live in. Rent out DC home for up to two more years, then sell and be able to still pocket capital gains as a primary residence. Then sell our new fixer-upper and do the same with the earnings. Use those capital gains and savings for buying more permanent primary residence and second and third investment properties.
Our monthly expenses are around $2,500 nowadays, and with a family I’d need a cash flow of probably $3-4K to declare FI. With option B we could likely get more cash to accumulate more diverse properties within the next 5 years, but I’m not sure it could equal the cash flow of the DC house. On the other hand, the DC house is so old that I’m always afraid of large unexpected maintenance costs that could eat up profits quickly, and I also worry about a potential bubble. Part of me wants to sell it and get the cap gains to start diversifying, but I also think we are pretty lucky to have this property. What should I be considering?